In contrast to the gold price in dollars the gold price in euro has largely been stable since August but this has been in an environment of a sharply lower euro/US dollar FX rate (-4%) indicating a much weaker euro and sharply lower euro real yields falling from -0.32% when we last looked at the chart to the current -0.457%. Both of these variables would be expected to be positive for the gold price in euro terms.
Given these large moves in terms of euro weakness and increasingly negative real yields we find the stability of the gold price in euro surprising and would expect to see some amount of “catch-up” in terms of higher prices if the previous historical relationships were to reestablish themselves. There is of course also the possibility of a sharply stronger euro going forward accompanied with higher real yields but we find this outcome to be less probable given the growing divergence in the trajectory of monetary policy between the Federal Reserve and the European Central Bank and also the vicious cycle of disinflation and low GDP growth in which the Euro area appears to be trapped.
In terms of the gold price in dollars, we do not anticipate any sharp moves in US real yields in the immediate feature as the economy recovers albeit at a slow pace. Based on the relationship we observe in the chart, should the dollar stabilize at current levels we would expect the gold price in dollars to also stabilize at current levels but it will certainly be vulnerable to further weakness should the strength in the dollar seen over the last few months extend.
This article was written Treesdale Partners, portfolio manager of the AdvisorShares Gartman Gold/Euro ETF (GEUR), AdvisorShares Gartman Gold/British Pound ETF (GGBP), AdvisorShares Gartman Gold/Yen ETF (GYEN) and AdvisorShares International Gold ETF (GLDE).